Technical Advice to the Commission on possible treatments of unrealised gains measured at fair value

Status: Final draft adopted by the EBA and submitted to the European Commission

Article 35 of Regulation 575/2013 (Capital Requirements Regulation - CRR) states that institutions shall not make adjustments to remove from their own funds unrealised gains or losses on their assets or liabilities measured at fair value. In this context, Article 80(4) of the CRR requires the EBA to provide technical advice to the Commission on possible treatments of unrealised gains measured at fair value other than including them in Common Equity Tier 1 without adjustment.

The European Banking Authority (EBA) published today its technical advice on possible treatments of unrealised gains measured at fair value. The advice provides specific recommendations that will inform the European Commission (EC) as to whether changes to legislation should be introduced in order to sterilise the effect of unrealised gains on regulatory capital (so-called "prudential filters").

The EBA concluded that unrealised gains show significant volatility and may disappear quickly in certain market conditions. This is an issue of concern for banking supervisors, since depending on the economic environment unrealised gains may happen to represent a significant proportion of credit institutions' own funds. Hence, the EBA sees advantages in introducing prudential filters for unrealised gains.

The EBA also acknowledges that several aspects would have to be further analysed. In particular, the on-going work of the Basel Committee on Banking Supervision (BCBS) in this area will have to be taken into due consideration, to assess the possible effects of a lack of international consistency. Moreover, the interaction of prudential filters with the forthcoming EBA's proposals on prudent valuation will need to be carefully assessed.

The EBA remains available to conduct further work should the EC decide to introduce prudential filters for unrealised gains.

Legal basis and background

The Capital Requirements Regulation (CRR) states that institutions shall not make adjustments to remove from their own funds unrealised gains or losses on their assets or liabilities measured at fair value.

In this context, Article 80(4) of the CRR mandates the EBA to provide advice to the EC by 1 January 2014 on possible treatments of unrealised gains measured at fair value other than including them in Common Equity Tier 1 without adjustment. Such recommendations shall take into account relevant developments in international accounting standards and in international agreements on prudential standards for banks.

On 2 August 2013, the EBA published a Discussion Paper putting forward its preliminary views on these treatments and gathered the stakeholders' input on this issue. The input received has assisted the EBA in the finalisation of its Advice.